Opinion: Wal-Mart’s stock is ugly and getting uglier

Wal-Mart Stores Inc. posted fourth-quarter earnings Thursday, and the retailer’s stock tumbled because of the same old problem: anemic revenue growth and pressure on profits.

But, interestingly enough, Wal-Mart’s
WMT, +0.44%
stock had performed quite well in the past few months even as the broader market melted down. Wal-Mart has risen about 7% since mid-November, compared with a decline of almost 9% for the S&P 500 Index.

Throw in a 3.1% dividend and a huge reach that makes this retailer a bit more stable than other investments in a so-called risk-off environment, and Wal-Mart doesn’t look bad, right?

Wrong.

Wal-Mart may be big, but that doesn’t mean its stock is a “buy.” This is a company beset by chronic challenges in key financial metrics, and a persistent inability to connect with consumers that could limit growth for years to come.

Here’s why you should dump Wal-Mart after Thursday’s earnings, taking the modest gains since November and running for the exit:

Bad earnings, worse guidance: Wal-Mart reported a drop in revenue and earnings. That’s strike one. Worse, while Wall Street wasn’t expecting a killer quarter, it was expecting things to be less bad than they were. Missing expectations in the fourth quarter is strike two. And, finally, Wal-Mart offered weak forward guidance as a hint that more of this mess is to come. That’s strike three. You can get all the specifics if you want them, but that pretty much sums up the state of affairs.

Higher wages haven’t paid off yet: Now let’s dig deeper, specifically into Wal-Mart’s 2015 wage increases that have dragged down profits significantly. The idea was that if Wal-Mart treated its employees better, it would see less turnover and better results. It was a bet worth taking, considering some rather shocking numbers — chief among them, a Bloomberg estimate in 2015 that pegged annual theft losses at $7 billion. And considering that the top cause of theft in the U.S. is actually from employees and not shoplifters, part of the thinking was that happier associates would be more likely to protect their employer. But a year in, it’s easy to see the costs and hard to see the benefits. And with another bump from $9 to $10 coming this February, this is as much a future concern as it is one from last year. If past is precedent, the most recent wage bump will also fail to be a net positive for Wal-Mart numbers.

Other spending feels wasteful, too: As I wrote in November, Wal-Mart isn’t just wasting money on wages but also on a dramatic uptick in capital investments that includes $12.4 billion in fiscal 2016 and another $11 billion in fiscal 2017. Anyone who has ever visited a Wal-Mart brick-and-mortar location would agree that the stores aren’t exactly a premium experience, but who among their core customer in middle America cares? Discounters like Dollar General
DG, +0.43%
aren’t exactly the Taj Mahal either, but the point is to compete on price and convenience, not to outdo higher-end retailers on some intangible “shopping experience.” Spending tens of billions on changing shopper perceptions of Wal-Mart seems wasteful and a losing battle, particularly given that numbers haven’t showed a lift yet, and guidance remains ugly.

Missed e-commerce opportunity: Whether it’s the dominance of Amazon
AMZN, -0.23%
or just a poor corporate strategy, the numbers show Wal-Mart is failing miserably in its e-commerce efforts. As Phil Wahba of Fortune points out, the 8% expansion in online sales last quarter was yet another drop in Wal-Mart’s growth rate. In the fourth quarter of 2013, online sales grew 30% and a year later they grew 22%. Considering the continued organic growth in e-commerce, with roughly 15% growth overall in U.S. online sales last year, the fact that Wal-Mart isn’t at least pacing the market at large is a huge disappointment, and a huge challenge for Wal-Mart stock holders.

Global growth drags: I, for one, don’t have much sympathy for the whole “strong dollar excuse” that multinationals tend to trot out. But even if you grant Wal-Mart a handicap based on currency troubles, its Wal-Mart international division posted just 3.3% revenue growth adjusted for forex and a 7.8% decline in earnings adjusted for forex. When you’re no good at e-commerce and the U.S. business is challenged, you can’t afford to settle for numbers like this abroad.

No bargain valuation yet: Wal-Mart trades for a forward price-to-earnings ratio of almost 15, which hardly makes it a bargain, particularly given that its peers like Target
TGT, -0.87%
and Dollar General are right in that ballpark, too. And when you consider that it has made a habit of missing expectations and lowering guidance, there’s reason to expect the denominator in that equation (earnings) to get smaller rather than the numerator getting larger (price).

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